Keppel Infrastructure Trust announces SGD NC10 perpetuals at IPG of 5.15%

Keppel Infrastructure Trust (KIT) plans to issue new SGD NC10 perpetuals at an initial price guidance (IPG) of 5.15%. These bonds come with an issuer call option on Year 10 and every 10 years thereafter. The reset rate will be based on the prevailing 10y SORA-OIS plus an initial spread, with a step-up of 100bps in the event of a non-call.

The issuer is unrated, and the bond is expected to be unrated too. Net proceeds from this issuance will be used to (i) refinance the borrowings of KIT and its subsidiaries; (ii) finance the general working capital purposes and/or capital expenditure requirements of the Group; and/or (iii) financing or refinancing acquisitions and/or investment of the Group and any asset enhancement works of the Group.

About Keppel Infrastructure Trust

(Unless otherwise stated, all dollar values are in SGD, all growth rates are YoY, and data is as of 1H24.)

KIT is a business trust focused on infrastructure with three core segments: Energy Transition (60%), Environmental Services (7%), and Distribution & Storage (32%) (figures here are percentage of total assets of $8.8b) (Chart 1). We last provided an update on KIT bonds in late 2023 for their 9M23 figures, and now provide a quick overview of their 1H24 financials released just a few days back.

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Chart 1: Breakdown of assets (% of total $8.8b)

Financial highlights

Revenues fell by -6%, from $1,063m in 1H23 to $1,002m in 1H24. The Energy Transition segment was the most resilient with a +2% increase in revenues, helped by higher gas sales from City Energy, but partly offset by lower distributions from Aramco Gas Pipelines Company. Meanwhile, the Environmental Services segment saw “near-term pricing headwinds” within Korea, while the Distribution & Storage segment was hurt by lower commodity pricing and weaker AUD exchange rates for Ixom’s revenues.

Meanwhile, expenses also fell slightly by -1% from $1,024m in 1H23 to $1,013m in 1H24. The main contributor arose from the “raw materials, consumables, and changes in inventories” sub-segment where expenses dropped by about -$64m, which KIT attributed to lower expenses from Ixom.

Overall, the -1% decline in expenses was insufficient to offset the -6% revenue fall, and KIT slipped into the red for 1H24. Losses before tax came in at -$9.0m in 1H24, compared to profits before tax (PBT) of $48m in 1H23 (Chart 3). Meanwhile, net losses also came in at -$28.0m in 1H24, compared to net profits of $31.9m in 1H23.

Chart 2: Revenue ($m)

Chart 3: PBT ($m)

Outlook

Acquisitions completed in 4Q22 (German Offshore Wind Farm and Eco Management Korea Holdings) likely were contributors to decent headline growth in FY23. This strong performance in FY23 (including 1H23) likely contributed to the weaker 1H24 performance on a sequential basis – this moderation of headline growth figures was something we had anticipated in our last article too.

We think that the two acquisitions above are interesting add-ons to KIT’s portfolio within Energy Transition and Environmental Services respectively, with the former including long-term 20y agreements with Ørsted AS and the latter being a leading integrated waste management player in South Korea. Meanwhile, we are more cautious about their recent acquisition of Ventura. While Ventura is a key player in Victoria’s (Australia) Zero Emission Bus Trial and may tie in with KIT’s theme of “green transition”, we do not see as much direct synergies between Ventura and the rest of KIT’s businesses.

Broadly speaking, notwithstanding the recent uninspiring performance, we think that KIT’s business model generally lends itself to earnings stability over the medium term. We wrote about this previously in our last coverage (linked above), with a majority (70%) of its portfolio having cost pass-through mechanisms or CPI-linked (inflation) escalations. In addition, another 20% of its businesses have dominant market positions (e.g. City Energy) which also helps its broader pricing power.

Credit highlights

KIT’s credit metrics have generally worsened over time (Table 1). Net finance costs generally increased both HoH and YoY, with 1H24 finance costs coming in at $88m ($171m for trailing 12 months). Furthermore, some of its debt metrics like net-debt-to-EBITDA, net-debt-to-total-assets (or net gearing), and net-debt-to-total-equity, all have shown a worsening trend over the past year, mostly due to the increase in the company’s net debt (and gross debt) levels.

(Note: There may be some discrepancies between our estimates and official company figures, likely if there are differing assumptions. This is especially true since KIT has stopped releasing their official EBITDA estimates [last released in FY23].)

Despite this, KIT continues to hold about $483m in cash, which could provide it with sufficient liquidity for the coming years. This is in view of its fairly well-diversified debt profile, with most of its 2024 debt already refinanced (Chart 4). Despite this, we emphasise that this new issue is a perpetual with a long time (10 years) to next call/reset. While KIT’s overall credit profile remains decent for now, it is much harder to forecast its credit profile in 10 years’ time, and investors should demand some term premium for this new issue considering the fairly long tenor.

Table 1: KIT’s Credit Metrics

Chart 4: Debt Maturity Profile ($m)

Thoughts on new issue

We compare these KIT bonds to its existing issuances – these include 2 SGD non-perpetuals and 2 SGD perpetuals – as well as the benchmark 10y SGS. Overall, this new issue appears to be issued at a higher yield (5.15%) compared to its peers, which generally offer high-3% yields (non-perpetuals) or around 4.5% (perpetuals). Spreads-wise, the IPG of 5.15% represents about a 220bps spread over the benchmark 10y SGS, compared to the existing perpetuals which are trading at spreads of about 180bps. Nonetheless, we highlight that the final price guidance (FPG) is likely to come in lower than the IPG of 5.15%.

We also reiterate that perpetuals come with non-call risks. While this new issue does come with a step-up of 100bps which would theoretically disincentivise a non-call, we also note that it has a whopping 10 years to next reset/call – as we highlighted in the previous section, we think that investors should assign a sizeable term premium to such bonds with a long time to reset/call.

Taking these together, and the fact that the FPG is likely to come in lower than the IPG of 5.15%, we think this new issue looks fairly priced.

Table 2: Comparison against peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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